More Tips On Cutting The Tax Bill

December 12, 1994|GERALD REISS Taxes

In a previous article, I discussed ways to reduce your tax liability by shifting income to children, shifting income from one year to the next, bunching income and deductions, contributing to a retirement plan and by reviewing your capital and passive activity investments.

Here are some more specific things you can do to pay less tax, overall, or defer payments into the future.

As previously mentioned, if your 1993 adjusted gross income was over $150,000 and you were liable for estimated taxes, you were required to pay 1994 quarterly estimates at least equal to 110 percent of your 1993 tax in order to be protected from penalties.

If, however, 90 percent of your actual 1994 tax is paid in by the final quarterly due date of Jan. 1, 1995, no additional payments would be required.

For example, if your tax for 1993 was $100,000, you should be making a quarterly estimate of $27,500 ($110,000 divided by 4). If, however, you or your tax adviser determine that your 1994 tax will only be $90,000, you would not be required to make the last estimated payment because 90 percent of $90,000 is $81,000, and you already have paid in $82,500 ($27,500 times 3).

The $7,500 balance due would not be payable until April 15, 1995, when you file your return.

If you have investments in your portfolio that would result in a capital loss if sold, and, from an investment standpoint, it would be prudent to sell, this loss can be used to offset any capital gains you may have realized this year.

If you already have offset all your capital gains, or if you have no capital gains, you can deduct up to an additional $3,000 of capital losses against other types of income. In the 39.6 percent top bracket, this is a tax savings of $1,188.

If you have an investment that would result in a capital gain on sale, you can sell the same stock short in 1994 to lock in the gain, but not recognize the gain until you complete the transaction by delivering your shares in 1995. This is called a sale "against the box."

Long-term capital gains on investments can be totally avoided if you donate the appreciated investment to a qualified charity.

It also may be beneficial to sell a mutual fund that is about to declare a large dividend at year end.

The gain on the sale would be capital, the dividend would be ordinary.

Business entities such as corporations, partnerships and sole proprietors may be able to deduct up to $17,500 of tangible personal property purchased and placed in service during 1994, even if purchased at year-end. If you are in the market now for qualifying property to be used in your business, it may be advantageous to accelerate your purchase and reap the 1994 deduction benefit.

We Floridians also need to be wary of the Florida Intangible Tax, and there are a few things that can be done to minimize its tax effect.

If you have a substantial amount in a money market mutual fund at year end, and most money market mutual funds are taxable (not money market accounts at a bank, but money market mutual funds), you can transfer the balance into a cash account with the broker and avoid paying the Florida Intangible Tax on those funds.

Perhaps you have just sold some investments and the dollars are in the cash account of the brokerage house.

It may be better to leave the dollars in the cash account and reinvest after January 1, 1995, to avoid the Florida Intangible Tax on those funds as well.